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(Insight) Opportunities And Challenges To The Icelandair Buyout Of WOW Air

Icelandair Buys WOW Air

Experience The Skies reported that Icelandair formally purchased chief rival WOW Air (refer to post here) earlier. In the following insight, we will dig deeper into the opportunities and challenges as the new Icelandair Group competes with European and North American airlines for more passengers.

 

New Icelandair Group

The new Icelandair Group will be one of the biggest employers in Iceland. Before we discuss the opportunities and challenges for the group, here are some combined statistics based on the latest information published by Icelandair Group and WOW Air separately:

  • Workplace: ~5,300 employees
  • Current Fleet Size:  35 aircrafts (Boeing 737s – 3, Boeing 757s – 28, Boeing 767 – 4, Airbus A320/A321s – 17, Airbus A330s – 3)
  • Order Book: 18 aircrafts (Boeing 737s – 13 (see video below on the MAX), Boeing 787 – 1, Airbus A330s – 4)
  • Destinations Served: ~80 (including year round and seasonal operations)
  • Revenue: ~US$2.12 billion (up ~18% year to year)
  • Net Profit/Loss: ~US$15.66 million (down ~87% year to year)

While the majority (~77%) of the per merged Icelandair Group’s income is from flight operations (passenger and cargo), it also earns revenue from its investments from other airlines, travel agency, hotel and other tourism ventures.

 

Opportunities 

There are four areas the combined Icelandair Group can find opportunities:

  1. Route network refinements: Around 25% of their combined route network of 80 total destinations are overlapped. That means there may be some markets that can use a reduction in frequencies to support new routes.  Timing on feeder flights to other European destinations can be reworked to maximize supply/demand and increase barrier of entry.
  2. Headquarter functions: Some areas like information technology, human resources and procurement could be combined to build commonalities and efficiencies. This would reduce overhead costs.
  3. Marketing and loyalty program integration: While the airlines will continue to operate as separate entities with different branding and products, some marketing efforts could be combined. For example, social media teams could join forces and build on their strengths on different platforms. Icelandair has a bigger presence on Instagram and YouTube while WOW Air is more popular on Facebook. The airlines can also explore opportunities to maximize choices for consumers by codesharing, link Saga frequent flyer programs to improve the value proposition on WOW Air flights, and streamline ancillary revenue generation options.
  4. Airport support: Both airlines use Keflavík International Airport (KEF) as their home base, the new group can work with the airport authority to streamline processes with the goal to improve passenger processing, flow, and service offerings.  

Challenges

Combining airlines always have its challenges. Typically, the new airline will face additional costs for 12-18 months as it evaluates and streamlines its entire operations. Management may face morale challenges over employment uncertainty and cultural differences in the short term.

Both airlines may have received incentives from airport authorities to start new flights, they are obligated to complete these terms before Icelandair Group can end any unprofitable routes. Any previous route announcements (such as to Vancouver International Airport (YVR) or Orlando International Airport (MCO)) could be delayed or shelfed which could impact passengers with a purchased ticket. Speaking of passengers, any route elimination may lead to higher ticket prices as supply and competition decreases and are not backfilled.

Icelandair and WOW Air’s rapid expansion chiefly contributed to a 28.3% increase in passengers to Keflavík International Airport between 2016 to 2017. The airport added seven new gates in 2016 and had forecasted total passenger count to improve from 8.75 million to more than 14.5 million by 2025. As such, the airport authority created a master plan that would add significant number of gates and possibly a third runway within the new 7-10 years to accommodate this group. This masterplan may need to be re-examined now that there is only one airline group though likely wouldn’t change as growth will likely to continue amid at a lower pace.

 

Additionally, downstream supplies like tour agencies and hotel operators may experience smaller than forecast growth as the new airline pare down some unprofitable international routes in the near future.

 


About Larry Leung and Experience The Skies

Larry Leung is the Director of Research and Strategy at Experience The Skies. He is a certified avgeek, a public speaker and a dessert and design enthusiast. Contact him through LinkedIn, Twitter or email.

Experience The Skies is a consulting company based in Toronto, Canada that specializes in the travel industry with focus on the assessment, competitive analysis and development of loyalty programs, technologies, marketing, ancillary revenue solutions. Find out how Experience The Skies can assist in evaluating the entire customer journey from booking to the travel experience by contacting general@experiencetheskies.com or follow other posts on TwitterFacebookFlipboard, and Instagram.

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